LONDON: Sterling fell against the dollar on Thursday, moving back towards the previous session's 11-month low, on expectations that a rise in British interest rates will be delayed.
The dollar stabilised after a sharp sell-off on Wednesday following weaker-than-expected retail sales data. That pushed back expectations for a rate rise in the United States into 2016 and investors cut favourable dollar bets.
Sterling was down 0.3 percent against the dollar at $1.5975 , having hit $1.5875 on Wednesday. Sterling has lost ground all week as inflation fell to its lowest in five years.
It also fell to a one-month low against the euro on Wednesday, but recovered to trade slightly higher at 80 pence per euro on Thursday.
Wage data released on Wednesday, showed earnings were still lagging inflation. The Bank of England (BoE) has said that any rise in interest rates from their historic lows will be dependent on economic data, especially wage growth.
Gilts and money market instruments suggest expectations on UK rates have shifted, most likely to July or later from the first quarter of next year. A number of banks, including UBS and RBS, have pushed back their rate hike forecasts.
"The UK will still be the fastest growing economy in the G7 this year; but then, it would also be erroneous to presume that UK interest rates will be rising come what may," Bank of New York Mellon head of currency strategy, Simon Derrick, said.
"Fresh political uncertainty lurks on the horizon. So when will sterling find its feet? It may take a little longer than you think."
Expectations that the BoE would be the first major central bank to raise rates drove sterling to a six-year peak against the dollar in July. But increased signs of economic weakness -- partly a spillover from the euro zone -- and the sharp fall in inflation have poured cold water on those expectations.
BoE Governor Mark Carney struck a dovish tone on Monday, saying the bank's rate-setting committee would have to take into account "a more modest global recovery, particularly if that's the case in Europe".
Another BoE policymaker Martin Weale said on Wednesday that it was not up to the central bank to tell markets what to expect and the bank's so-called forward guidance policy was never intended to be a promise on when rates might rise.
Investors are also growing wary about political risks in Britain that they say could have a bearing on investment flows and the pound.
The latest polling showed growing support for anti-EU party UKIP, whose leader said he would demand an immediate referendum on European Union membership as the price of supporting any coalition government after elections next May.
"Given the surge in the UKIP vote, a hung parliament could yet leave the UK with unprecedented political uncertainty that could once again dramatically weigh on the pound," BBVA currency strategist Peter Frank said.
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